Notes on the Growth Challenge

Keywords: Growth & Innovation; Political Economy & History;

Those who debate the economy are challenged by theGrowth Culturereport of the Growth and Innovation Board .* The economic debate of the last four decades has largely been among the elite. This study asked what do New Zealanders think of economic growth?’

The short answer is: not very much. In fact you think of negatives associated with economic growth more than the positives. On the top of your list was traffic congestion, followed by a growing gap between rich and poor. Next came positives of more opportunities and a more prosperous New Zealand for future generations, and then there were a bunch of negatives (more stress and pressure on the average person pressure on resources) and positives (better education and health systems).

Such survey responses depend on the precise questions being asked but, even so, the public is a lot more cautious about economic growth than the public debate. It was not so long ago that it was talking about getting us into the top half of the OECD, measured by per capita Gross Domestic Product, as if there were no downsides at all. (Some troglodytes continue to talk like this.)

When the report came out, at least two major figures said the public did not know what it was talking about. It was arrogance rather than listening. However, many of the elite greeted the report with a stunned into silence, followed with – often shrewd – questions, and then they made a real attempt to engage with what you were trying to say.

It may have been this. The usual indicator of economic output, GDP, does not capture all your aspirations. Sometimes an increase in output, as we measure it, may even be inimical to them. So when somebody says, ‘raising taxes to fund transport investment is bad for economic growth’ your reaction, sitting there fuming in the traffic fumes, is to say ‘I’m against economic growth’.

Actually, when we look carefully at your responses, we find you are not. Rather the things you want – such as jobs education and healthcare, and opportunities for yourself and for others – are closely associated with rises in output. Richer countries even treat their environment better than poorer countries (although they may have done considerable damage getting there). Of course you bridle if some developer comes along with a project which compromises the environment, just as you bridle at the higher taxation when the Minister for the Environment pleads for more resources to address environmental degradation. These are tradeoffs inherent in economic policy.

Ironically, almost all the policies to promote GDP also promote the growth you desire. To give an example, the (not entirely reliable) statistical evidence suggests that New Zealanders work longer hours than workers in other OECD countries. Suppose New Zealanders wanted to work shorter hours. The point is not to say that you dont know what you are talking about and we will never reach the top half of the OECD if you insist of not working. My job as an economist is to ensure you understand that by working shorter hours you will have less material consumption, if more leisure. You are in charge of that tradeoff, not some economic elite.

But I cannot think of a single growth promoting policy I would change, were you to demand shorter hours. In particular we still need a vigorous, globally connected, innovative and profitable business sector. The one thing which might change this would be if you said you wanted security and stability, rather than novelty and opportunity. On the whole, the survey says you want the latter.

The big difference is not how we would produce things (although at the margin the treatment of the environment is important) but how we would spend the proceeds. Earlier I mentioned those who say that we need to reduce taxation to promote economic growth. But while an inefficient tax system is a burden on an economy, there is surprisingly little evidence that moderate efficient taxation reduces output. The overall tax rate controls the balance between public and private expenditure. The evidence suggests that your relative desire for some public goods may be a little higher than the quantity suppled. That is a tradeoff we will be voting on at the end of the year.

* I am a member of GIAB, but these notes reflects my views only.